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ACCT11059 USING ACCOUNTING

FOR DECISION MAKING


ASSIGNMENT STAGE 3 (ASS#3):

Student Name: Emma Walker


Student Number: S0239551
Course Coordinator: Maria Tyler
Emma Walker
Making

Due Date: 15th February 2016


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Contents
Step 1 Ratio Analysis..........................................................................................................3
Step 2 Capital Investment Decision....................................................................................7
Step 3 - Giving and Receiving Feedback...............................................................................9
Table of Figures
Figure 1 Profitability Ratios Caltex Australia Ltd 2014-2011................................................3
Figure 2 Efficiency (or Asset Management) Ratio Caltex Australia Ltd 2014-2011..............3
Figure 3 Current Ratio Caltex Australia Ltd 2014-2011.........................................................4
Figure 4 Financial Structure Ratios............................................................................................4
Figure 5 Market Ratios Caltex Australia Ltd 2014-2011........................................................5
Figure 6 Ratios Based on Reformulated Financial Statements Caltex Australia Ltd 20142011............................................................................................................................................5
Figure 7 Economic Profit Caltex Australia Ltd 2014-2011....................................................6
Step 1 Ratio Analysis
The ratio analysis has been conducted and can be viewed in the accompanying spreadsheet.
These results have been analysed as follows;
Profitability Ratios
Net Profit
Margin
Return on
Assets

Net Profit after Tax/Sales

2014
0.09%
2014
0.44%

Net Profit after Tax/Total


Assets

2013
2.14%
2013
8.78%

2012
0.25%
2012
1.07%

2011
-3.23%
2011
14.67%

Figure 1 Profitability Ratios Caltex Australia Ltd 2014-2011

The Net Profit Margin Ratio determines the percentage of net profit made from every dollar
sale. As we can see from the results shown in the table above, there has been quite a big
difference in net profit over the past four years with the year 2011 being quite a large concern
as they were in a large negative percentage. The drop in 2011 however could quite possibly
be due to Caltex Australia Ltd ceasing operation of the Kurnell Refinery which incurred large
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expenses. There was a significant fall again in 2014 which is said to be as a result of
efficiency review fees, redundancy fees and contract cancellation fees etc.
The Return on Assets ratio determines how efficiently Caltex Australia Ltd uses their assets
to produce profit and similar to the above Net Profit Margin ratio, this ratio also differs quite
significantly over the years with 2011 remaining a concern at a large negative percentage
which again would be as a result of the costs incurred with ceasing operation of the Kurnell
Refinery.
Efficiency (or Asset Management) Ratios
Total Asset
Turnover Ratio

Sales/Total Assets

2014
9.57

2013
9.50

2012
10.77

2011
9.97

Figure 2 Efficiency (or Asset Management) Ratio Caltex Australia Ltd 2014-2011

The Total Asset Turnover ratio tells us how many sales are generated from the companys
assets i.e. for every dollar of total assets, how much is being generated in sales. The results in
figure are fairly stable illustrating that Caltex Australia Ltd uses their assets efficiently.
Liquidity Ratios
Current Ratio

Current Assets/Current
Liabilities

2014
1.40

2013
1.57

2012
1.81

2011
1.39

Figure 3 Current Ratio Caltex Australia Ltd 2014-2011

The current ratio shows how much Caltex Australia can pay off their liabilities with their
current assets. Caltex Australias liquidity was stable over the four years illustrating they do
have enough assets to pay off their debts. We can see for every dollar of debt, Caltex
Australia Ltd has $1.40+ to pay for it. The company states in their 2012 annual report that
The Group manages liquidity risk by maintaining adequate reserves, banking facilities and
reserve borrowing facilities by continuously monitoring forecast and actual cash flows and
matching maturity profiles of financial assets and liabilities (Annual Report 2012).
Financial Structure Ratios
Debt/Equity
Ratio

Debt/Equity

2014
102.5%

2013
131.8%

2012
149.4%

2011
119.2%

Equity Ratio

Equity/Total Assets

2014
49.4%

2013
43.1%

2012
40.1%

2011
45.6%

Figure 4 Financial Structure Ratios

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Two ratios are shown above to identify the financial structure i.e. where the companies
finance is coming from. The debt to equity ratio shows us the percentage of Caltex Australias
debt which is used to finance their assets. As we can see in the above table, each year is over
100% indicating that majority of the finance has been borrowed which can cause concern if
the company did not have the ability to repay these debts and therefore indicates risk to
investors. It is positive to see his figure reducing from 2012 to 2014.
The equity ratio identifies how much of our assets are funded by Caltex Australia Ltd.s
owners and from the results in figure 5, we can see that around 40-50% of Caltex Australia
Ltd.s assets from 2011-2014 have been funded by their equity/owners over the past four
years. This has been the same over the four years.
Market Ratios
Earnings Per
Share (EPS)
Dividends per
Share
Price Earnings
Ratio

Net Profit after Tax/Nos


of Issued Ordinary
Shares
Dividends/Number of
Issued Ordinary Shares

2014
0.09

2013
2.22

2012
0.21

2011
(2.64)

2014
(0.41)

2013
(0.46)

2012
(0.45)

2011
(0.47)

Market Price per


Share/Earnings per
Share

2014
4.62

2013
0.10

2012
0.91

2011
(0.04)

Figure 5 Market Ratios Caltex Australia Ltd 2014-2011

The earnings per share (EPS) ratios illustrate how much net profit was earned per share.
Unfortunately in 2011 there was quite a large negative figure however a big increase can be
seen in 2013 which then dropped again significantly in 2014. The dividends per share shows
how much of the net income was distributed in dividends, all figures for all four years are in
negative which indicates that there was no dividend payments at this time (Why negative).
The price earnings per share ratios indicate the amount of money an investor is willing to pay
to earn one dollar of earnings in return. The results show a dim negative figure for 2011
however it has increased to a healthy $4.62 in 2014.
Ratios Based on Reformulated Financial Statements
Return on
Equity (ROE)
Return on Net
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Comprehensive
Income/Shareholders
Equity
Operating Income after

2014
1.48%

2013
21.58%

2012
2.77%

2014

2013

2012

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2011
33.37%
2011

Operating
Assets (RNOA)
Net Borrowing
Cost (NBC)

Tax (OI)/Net Operating


Assets (NOA)
Net Fin. Expenses after
Tax/Net Fin. Obligations

Profit Margin

Operating Income after

(PM)
Asset Turnover

Tax (OI)/Sales
Sales/Net Operating

(ATO)

Assets (NOA)

3.58%

17.59%

4.11%

2014
11.26%
2014
0.48%

2013
-6.60%

2012
-7.17%

24.44%
2011
-7.59%

2013
2.52%

2012
0.55%

2011
-3.14%

2014
7.51

2013
6.97

2012
7.48

2011
7.79

Figure 6 Ratios Based on Reformulated Financial Statements Caltex Australia Ltd 2014-2011

The return on equity (ROE) ratio tells us what percentage of the Shareholders equity came
from comprehensive income. We can see in 2011 there was a large negative percentage which
would have been due to the cease of operations at the Kurnell Refinery. This increased
slightly in 2012 with 2013 being quite a large percentage at 21.58%. Unfortunately this
plummeted again in 2014 which may also be due to the expenses paid out that year due to the
cease of operations at the Kurnell Refinery also.
The return on net assets ratio seeks to identify what percentage of revenue is being obtained
through current operating assets. Again, a large negative percentage is seen in 2011 and a low
positive in 2013 and 2014 as with other results, this again is no doubt due to the cease of
operations of the Kurnell Refinery in 2011.
Net borrowing costs seek to identify how much interest we are paying for every dollar of
obligations. It is said that lower figures are better and Caltex Australia Ltd are in a negative
percentage meaning they are not paying interest on obligations for these years.
Caltex Australia Ltd. profit margin results are quite poor in 2011 and 2014 as a result of the
debts that resulted from the ceasing of the Kurnell Refinery. The results in 2012 also seem to
have been affected by this. In 2013 we can see quite a positive spike which seems to be as a
result of the sale of property, plant and equipment which saw a cash injection of $44,881
there was also significant reduction in the leases and finance charges on capital leases which
added to this spike.
The asset turnover ratio seeks to identify how efficient Caltex Australia Ltd is in using its
assets. Whilst the figure is positive, when comparing this to the total asset turnover ratio we
can see it has reduced meaning it isnt as efficient as originally thought.
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Economic Profit
Economic

(RNOA Cost of

Profit

Capital) x Net

2014
(207,148.
0)

2013
268,564
.0

2012
(183,076.
0)

2011
(976,970.
8)

Operating Assets
(NOA)
Figure 7 Economic Profit Caltex Australia Ltd 2014-2011

The economic profit, unlike the accounting profit, deducts the opportunity costs
from revenues earned. I had looked through the annual reports and was unable to find the
weighted average cost of capital (WACC) so 10%, as advised, was used.
Drivers of Economic Profit
The result for the period 2011 shows a large negative figure which is believed to be due to the
expenses incurred during the ceasing of operations at the Kurnell Plant. Their notes in their
2011 annual report state that impairment expenses in excess of $1.5b was recognised during
the period relating to non-cash reductions in the refinery fixed asset carrying value due to a
challenging external environment (Caltex, 2012) this is said to be caused by the ongoing
strength of the Australian dollar as well as the closure of certain refining units at Kurnell
(Caltex, 2012). This year saw a high result for ATO and tells that of the assets that are
available to them, they are using these quite efficiently for the period.
The results for period of 2012 still remain at a negative figure although this figure has
improved significantly in comparison to 2011. The results for this period are still obviously
affected by the decision in 2011 to cease some operations at the Kurnell Refinery however
Caltex Australia Ltd had negotiated a long term supply agreement with Chevron which gave
Caltex Australia the financial strength to invest in growth opportunities.
In 2013 we saw a significant increase moving this economic profit into a positive figure. The
significant increase may be due to the sale of the Sydney bitumen business which saw a $26m
(after tax) profit. However, there was a recorded loss of $78m which was a result the fall of
the Australian dollar during the period. The annual report states that the gross loss was
mitigated by the companys policy of hedging 50% of the outstanding US dollar payables. In
addition, crude price fluctuations resulted in an unfavourable timing lag of $33 million
(Caltex 2013). However, improved refinery reliability during the second half resulted in near
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record production of petrol, diesel and jet fuel for the full year, which is in line with the prior
year (Caltex 2013).
The period of 2014 saw another significant decrease in comparison to the previous year and
could be as a result of the complete closure of the Kurnell Refinery processing. The decrease
in results could quite possibly have been as a result of a loss of $112m after tax in relation to
redundancy expenses, contract cancellation costs, consulting fees and asset rationalisation
costs which were again, a result of the closure of the refining processes at the Kurnell site. An
inventory loss was also recorded due to the decline in crude oil prices; the net inventory loss
as a result was $361m after tax.

Step 2 Capital Investment Decision


After the closure of the refining at Caltex Australias Kurnell Refinery, Caltex Australia now
has an opportunity to open a new additional fuel holding yard in either Port Botany, Sydney
NSW or in the Port of Newcastle, Newcastle NSW. Caltex Australia would then plan to sell
the Port Botany holding yard in 5 years and the Newcastle holding yard in 10 years.
The original cost, the estimated life and estimated future cash flows of each investment
opportunity are set out in the below table.
Port Botany, Sydney

Port of Newcastle,
Newcastle

Original Cost

$140,000,000

$105,000,000

Estimated Life1

5 years

10 years

2016

$45m

$30m

2017

$50m

$30m

2018

$55m

$40m

2019

$55m

$45m

2020

$60m

$50m

Estimated future cash flows2

2021
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$50m
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2022

$55m

2023

$55m

2024

$55m

2025

$65m

1. The estimated life is how long Caltex Australia intends on owning the holding yard
before selling the holding yard.
2. The estimated future cash flows are estimated from sales of fuel from the holding yard
each year.
The investment would be made 31st December 2015 with the estimated cash flows to be
received on 31st December of each year.

The initial financial outlay of the two options differs quite substantially with the Port Botany
option being a whole $35mil more than the Port of Newcastle option. Not only is the Port
Botany option more expensive but there is little time to recoup the investment when the
intention to sell is just five years after the investment.
Upon comparison of the two options, despite the initial differences, the Port Botany, Sydney
option does offer a higher net present value (NPV) at $58.37m with a 24% internal rate of
return (IRR) and having a short payback period of just two years and 9 months of the initial
investment. The Port of Newcastle investment however offers only a $38.90m NPV with a
36% IRR and a payback period of 3 years and 1 month.
As it is suggested that any positive NPV result would be a good investment, the highest also
trumps all other differences and therefore trumps the high IRR for the Port of Newcastle
option i.e. the IRR and payback period. However, Port Botany, Sydney has the high NPV and
shorter payback period and therefore is my recommendation for Caltex Australia Ltd.s
investment.
Step 3 - Giving and Receiving Feedback
The following screen shots show the conversations had between myself and peers on issues
that we were experiencing.
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On Sunday 7th February I was unsure as to whether I was to use my total assets or net
assets to calculate some of my ratios, I put a note on the Moodle forum and Beverley kindly
replied and assisted in confirming that I was to use the total assets figure for these. I found
her response helpful to me which assisted in completing this part of my assignment.

Whilst awaiting feedback on my above post I came across a question asked by Sharon
Andreasson and as I had not long before listened to a lecture once again, felt I could assist in
her question. I replied as can be seen in the following screen shot. Unfortunately, I am unsure
as to whether I actually assisted much as her spreadsheets were very different to mine and the
information in the lectures werent really relevant to her spreadsheet either i.e. she did not
have a total revenue figure or an NFO calculated in her spreadsheets.

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Lastly, I was having issues with my Market Ratios which had me totally stumped. I had
thought that I needed to remove some of the digits from my share figures however was not
confident in doing so without some further advice. I posted the following question on Moodle
and received feedback from Nicholas Gregory which confirmed my initial thoughts and
assisted me in completing this section of the assignment. I found Nicholass response to be
incredibly helpful in completing this part of my assignment.

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References
Caltex Australia, 2012, 2011 Annual Report, viewed 10th February 2016,
http://microsites.caltex.com.au/annualreports/2011/assets/downloads/Caltex_AnnualReport11
.pdf
Caltex Australia, 2013, 2012 Annual Report, viewed 7th February 2016,
http://www.caltex.com.au/InvestorCentre/Pages/AnnualReports.aspx
Caltex Australia, 2014, 2013 Annual Report, viewed 7th February 2016,
http://www.caltex.com.au/InvestorCentre/Pages/AnnualReports.aspx
Caltex Australia, 2015, 2014 Annual Report, viewed 7th February 2016,
http://www.caltex.com.au/InvestorCentre/Pages/AnnualReports.aspx

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